In November 2011, the State Administration for Industry and Commerce ("SAIC") of the People's Republic of China (the "PRC") released the Administrative Measures for the Registration of Debt-for-Equity Swaps (the "Swap Measures") (公司债权转股权登记管理办). These Swap Measures took effect from 1 January 2012.

The Swap Measures set out the policy framework for the conversion of debt owed by a limited liability company established in the PRC, into equity in that company ("debt-forequity swap").

The Swap Measures

The Swap Measures make clear that debt-forequity swaps are permitted in the PRC as a form of non-cash capital contribution to a company registered in the PRC.

The Swap Measures contemplate that the following categories of debt may be swapped into equity:

  1. debt arising from a contract between the creditor and the company where the creditor does not contravene prohibitory provisions of PRC laws and regulations;
  2. debt that have been approved by courts; and
  3. debt listed in the reorganisation plans or in reconciliation (settlement) agreements approved by the relevant courts.

Process for Implementing the Debt-For- Equity Swap

The procedures for effecting a swap are as yet unclear and will be subject to further regulations issued by the PRC government or clarifications through Court rulings. It is however clear that to effect a swap, the following will be required:

  1. The debt to be swapped into equity has to be valued

    Prior to undertaking the swap, an approved assets valuation institution, generally referring to licensed audit or valuation firms in the PRC, will have to be appointed to value the debt. The terms of the swap must be such that the debt is converted at or below its appraised value.

  2. Non-Cash Capital Contribution

    The sum of the appraised capital contribution of invested debt-for-equity swap and the appraised capital contribution of other non-monetary properties is not to exceed seventy percent (70%) of the registered capital of the company.

  3. Capital Verification

    Capital contribution through debt-forequity swaps must be verified by a qualified capital verification institution that will issue a certificate (the "Valuation Certificate") specifying the following:

    1. basic information of the debt, including the time when such debt occurred, the name of title of the concerned parties, the subject matter of the contract and the fulfillment of obligations attached to the debt;
    2. valuation of the debt, including the name of the valuation institution, the document number of the Valuation Certificate, the benchmark date of the valuation, and the verified value;
    3. the progress of the debt-for-equity swap, including the conclusion of a debt-for-equity agreement, the creditor's exemption of the Company's debt;
    4. The accounting documents demonstrating relation to the debt cancellation; and
    5. the approval circumstances of the debt-for-equity swap if the approval thereof is required by law.
  4. Allocation of Creditors' rights

    In the event of competing claims by more than one creditor, the Swap Measures sets out a process of allocation of the converted equity between the creditors.

  5. Debt in a Foreign Invested Company

    A swap of debt into equity in a wholly foreign owned company or a sino foreign joint venture is subject to additional approvals by the authorities with regulatory authority over foreign investments.


The issue of the Swap Measures make clear the viability of PRC established companies issuing convertible instruments as a means of fund raising, and provides an additional means of investment in PRC companies. The actual procedures for effecting the swaps will have to wait further rulings in Court and implementing regulations or rulings.

This update is provided to you for general information and should not be relied upon as legal advice.